The Achieving a Better Life Experience (ABLE) Act of 2014 allows states to create tax-advantaged savings programs for eligible people with disabilities (designated beneficiaries). The beneficiary must be blind or disabled by age 26 to establish an ABLE account. The owner of the ABLE account is the beneficiary, and they can only have one account; however, more than one person can contribute to the account.
ABLE accounts provide many benefits including:
- Tax-free growth of the investment.
- Tax deductible contributions at the state level.
- Saver’s credit eligibility.
- Acceptance of rollovers from qualified tuition programs.
Another benefit is that the assets generally do not count against resource limitation requirements for several public aid programs. In addition, some states protect the account from inheritance taxes as well as Medicaid repayment requirements. The funds withdrawn from an ABLE account must be used for qualified expenses, which may include costs for education, transportation, job-related training, medical, assistive support, funeral costs and more.
Contributions are not tax deductible, although some states allow a deduction for contributions to an ABLE account. The maximum allowed contributions are tied to the gift tax limit, currently $16,000. Unlike the gift tax limit, the limit for ABLE accounts is per account, not per donor. States limit the account size, although it cannot be more than $520,000.
In addition to the $16,000, a beneficiary may contribute their own earnings to the account up to the current poverty level. For 2022, this is $12,880. If maxed out, contributions could be as much as $28,880 annually.
Suppose the disabled person is not a dependent of someone else. In that case, their contribution to an ABLE does count toward the retirement savers tax credit, a potential maximum credit of $2,000. In addition, a taxpayer can roll over a §529 plan (qualified tuition plan) to an ABLE account. An example of this might be if a child is in a car accident and becomes disabled. The parents and grandparents already contributed to a qualified tuition program, but the child will be unable to use that money for college. The person handling the financial decisions for the child can roll the assets in the §529 plan to an ABLE account. These rollovers are counted toward the $16,000 limit, so moving all the money over may take a while.
Be aware that any non-qualified distributions are subject to a 10% penalty. Also, any excess contributions, if not withdrawn by the due date of the return, are subject to an additional 6% excise tax. The list of qualified expenses is broad regarding necessary support items for health, independence or quality of life.